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Type of embedded derivative |
Codification reference |
Timing of assessment |
Holder/issuer |
Fair value of embedded derivative |
Non-option |
At inception |
Holder and issuer |
Terms should be set such that fair value would generally equal zero at inception. |
|
At acquisition, subsequent to inception |
Holder |
Terms should be set such that fair value would generally equal zero at acquisition date. |
||
Option-based |
At inception |
Holder and issuer |
Strike price based on stated terms such that intrinsic value may be other than zero at inception. |
|
At acquisition, subsequent to inception |
Holder |
Strike price based on stated terms such that intrinsic value may be other than zero at acquisition. |
In the absence of stated or implied terms, an entity may make its own determination of whether to account for the debt host as a fixed-rate, variable-rate, or zero-coupon bond. That determination requires the application of judgment, which is appropriate because the circumstances surrounding each hybrid instrument containing an embedded derivative may be different. That is, in the absence of stated or implied terms, it is appropriate to consider the features of the hybrid instrument, the issuer, and the market in which the instrument is issued, as well as other factors, to determine the characteristics of the debt host contract. However, an entity shall not express the characteristics of the debt host contract in a manner that would result in identifying an embedded derivative that is not already clearly present in a hybrid instrument. For example, it would be inappropriate to do either of the following:
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